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Chapter 4: Q11 (page 104)

Select the correct answer. A price floor will usually shift:

a. demand

b. supply

c. both

d. neither

Illustrate your answer with a diagram.

Short Answer

Expert verified

Price Floor will shift : d) Neither demand, nor supply.

Step by step solution

01

Price Floor Concept 

Price Floor is the minimum mandated price of a commodity, fixed by regulatory body, to protect the interests of sellers and prevent them from being exploited.

Example : Minimum support price of agricultural goods.

02

Detail Explanation 

Price Floor is just an imposed price, above the equilibrium price - ie where demand & supply curves intersect.

It doesn't shift either demand or supply curve, just fixes a price above their intersection point. A change in the price can cause movement along the existing demand and supply curves, but not a shift.

03

Diagram 

The equilibrium price is where demand & supply (D & S) intersect, denoted by P.

The floor price is set above equilibrium price at P*. As evident, it has shifted neither demand nor supply.

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Most popular questions from this chapter

Name some factors that can cause a shift in the

supply curve in labor markets.

Identify the most accurate statement. A price floor will have the largest effect if it is set:

a. substantially above the equilibrium price

b. slightly above the equilibrium price

c. slightly below the equilibrium price

d. substantially below the equilibrium price

How do economists define equilibrium in financial

markets?

Under what circumstances would a minimum wage be a nonbinding price floor? Under what circumstances would a living wage be a binding price floor?

Table 4.6 shows the amount of savings and borrowing in a market for loans to purchase homes, measured in millions of dollars, at various interest rates. What is the equilibrium interest rate and quantity in the capital financial market? How can you tell? Now, imagine that because of a shift in the perceptions of foreign investors, the supply curve shifts so that there will be $10 million less supplied at every interest rate. Calculate the new equilibrium interest rate and quantity, and explain why the direction of the interest rate shift makes intuitive sense.
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